“We remain sceptical,given that the revamped tax package is broadly revenue neutral relative to its previous iteration,” he said.
“And while the new tax package will redistribute benefits to those at the lower end of the income distribution,who have a higher marginal propensity to spend,we estimate that the boost to aggregate demand will be marginal.”
Albanese on Sunday said the rejigged tax package was good for the economy because it boosted labour supply while not fuelling inflation.
He said “easy politics is to hand out cheques”,such as through another low and middle income tax offset,but that would have only added to inflationary pressures.
“The challenge and the clear obligation that we had was to not put further pressure on inflation,” he told Sky News.
“We’re being very cautious about spending because the challenge for us is to assist people in the immediate without that being counterproductive. And if you just increase spending,then it can be counterproductive.”
In the Coalition’s last budget of March 2022,then treasurer Josh Frydenberg super-sized the existing low and middle income tax offset — which flowed to people earning up to $126,000 — to $1500. The increase took the total value of the offset to more than $12 billion,most of which was paid out to taxpayers in the first three months of the 2022-23 financial year.
Josh Frydenberg explains the 2022 budget,which contained an increase in the low and middle income tax offset.Credit:James Brickwood
Treasury was worried repeating the offset would add to inflationary pressures because it acted as a lump sum payment,preferring a tax cut which spread out financial support to workers over a longer period of time.
Its analysis of cutting the 19 per cent rate to 16 per cent shows it will boost the hours worked by people earning less than $45,000 a year,predominantly among women. This increase in labour supply,while small,is expected to take some inflationary pressures out of the job market.
Treasury is also forecasting that in its first full year of operation,the revamped stage 3 tax cuts will save the budget $1.3 billion,further reducing inflationary pressures. This will be fully offset in the 2025-26 financial year.
AMP senior economist Diana Mousina said there was a risk that giving larger tax cuts to middle-income households could give them greater spending power that would end up putting upward pressure on inflation.
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This group of people were more likely to spend their tax cuts. Higher income earners,who stood to gain almost $9100 in tax relief under the original proposal,were likely to save a fair proportion.
Mousina said the economic situation facing the country in coming months was likely to change.
“The economic environment when the tax changes start is likely to be weak as we see unemployment rising to 4.5 per cent by mid-year and home prices declining which will both drag on consumer spending,” she said.
“So while there is a risk that the tax changes add to inflation in mid-2024 and could challenge our current expectation for rate cuts starting from mid-year,for now,the RBA will be focusing on current inflation and growth figures to set interest rates.”
Figures to be released this week by the Australian Bureau of Statistics are expected to confirm a further slowdown in the annual rate of inflation to 4.2 per cent,which would be the lowest rate since the end of 2021.
At that rate,inflation would be running slower than expected by the Reserve Bank which had been expecting prices to have climbed by 4.5 per cent over the past year,contributing to the expectations of financial markets,and many economists,that the Reserve Bank will start cutting official interest rates in the second half of 2024.
The December quarter consumer price index is tipped by analysts to show prices up by 0.8 per cent through the final three months of the year,compared to 1.2 per cent in the September quarter.